All quiet on the western front

After another set of data suggesting the US economy remains in good health, equity markets continue to focus on growth, interest rates and inflation rather than the possibility of an escalation in trade wars.

Most of the other recent concerns, seem to be off the current investor radar, even if they have not gone away altogether. Though yields on Italian bonds have come back they remain well above where they were a few weeks ago. Another way to look at the assumed risk of a government debt is Credit Default Swaps. The cost of insuring against the Italian government defaulting has climbed sharply in the past few weeks and remains close to its highs.  Janet Henry, an ex-colleague and chief economist at HSBC, appearing on Bloomberg this morning made the point that the impact so far on the aluminium and steel tariffs is hard to quantify. That’s a good point if investors can’t quantify a risk they tend to ignore it, and that is possibly what is happening now. The G7 meeting towards the end of the week could change perception either for the better or worse and a delayed reaction may take place.

There was also some good news for the UK economy on Tuesday, in contrast to the generally disappointing economic data that has been released recently. Markit research released May’s services Purchasing Manager survey. The index reading climbed to 54, above the previous month 52.8 and expectations of 53. The results of these surveys, issued for countries all around the globe, are considered lead indicators for the strength or otherwise of those economies.

Currently, it feels hard to write anything constructive or alternative regarding what is the state of equity markets. Federal Reserve Bullard’s comments last week that he believes there is no rush to raise rates, the data suggesting economic growth remains resilient and the less than euphoric mood amongst investors at this moment in time appears to continue to provide a floor.

As we saw earlier in the year and on previous occasions during this extended bull run sentiment can always change quickly. Trump’s bark has tended to be worse than his bite however this trade imbalance seems to be a topic he is keen on. It is possible equity markets are underestimating his resolve. 

Posted on June 5, 2018 .